Question

Ravi and Kant are partners in a business with balances in their Capital and Current Accounts
31st March, 2021 were:
Capital Account
2,50,000
* 3,00,000
The firm earned an average profit of * 1,25,000. If the normal rate of return is 10%, find the value
goodwill by Capitalisation Method.
Ravi
Kant
Current Account
* 50,000 (Cr.)
25,000 (Dr.) ​

Answer 1

CORRECT QUESTION :

• ❖ Ravi and Kant are partners in a business with balances in their Capital and Current Accounts as on 31st March, 2018 were : Capital Account of Ravi Rs. 2,50,000; Capital Account of Kant Rs. 3,00,000; Current Account of Ravi Rs. 50,000 and Current Account of Kant Rs. 25,000 (Dr.) The firm earned an average profit of Rs. 1,25,000. If the normal rate of return is 10%, find the value of goodwill by Capitalisation Method.

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ANSWER :

• ✎ Value of Goodwill under Capitalization of Average Profit is Rs. 6,75,000.

• ✎ Value of Goodwill under Capitalization of Super Profit is Rs. 6,75,000.

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SOLUTION :

❒ Given :-

• Capital Account of Ravi = Rs. 2,50,000

• Capital Account of Kant = Rs. 3,00,000

• Current Account of Ravi = Rs. 50,000

• Current Account of Kant = Rs. 25,000 (Dr.)

• Average profit of the firm = Rs. 1,25,000

• Normal rate of return = 10%

❒ To Find :-

• Value of goodwill by Capitalization Method = ?

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❒ Calculation of Total Capital Employed :-

Here,

• Capital Account of Ravi = Rs. 2,50,000

• Capital Account of Kant = Rs. 3,00,000

• Current Account of Ravi = Rs. 50,000

• Current Account of Kant = Rs. 25,000 (Dr.)

∴ Total Capital Employed = Rs. 2,50,000 + Rs. 3,00,000 + Rs. 50,000 - Rs. 25,000

➨ Total Capital Employed = Rs. 6,00,000 - Rs. 25,000

➨ Total Capital Employed = Rs. 5,75,000

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❒ Calculation of Capitalized Value of Average Profit :-

Here,

• Average Profit of the firm = Rs. 1,25,000

• Normal Rate of Return = 10%

We know that,

• $\dag \: \: \underline{ \boxed{ \bold{ \: Capitalized \: \: Value \: \: of \: \: Average \: \: Profit = \dfrac{Average \: \: Profit \times 100}{Normal \: \: Rate \: \: of \: \: Return}}}}$

Using this formula,

• ✠ $\rm{ \: Capitalized \: \: Value \: \: of \: \: Average \: \: Profit = \dfrac{Super \: \: Profit \times 100}{Normal \: \: Rate \: \: of \: \: Return}}$

➨ Capitalized Value of Average Profit = Rs. ( $\rm{\dfrac{1,25,000 \times 100}{10}}$ )

➨ Capitalized Value of Average Profit = Rs. ( $\rm{\dfrac{1,25,00,000}{10}}$ )

➨ Capitalized Value of Average Profit = Rs. 12,50,000

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❒ Calculation of Normal Profit :-

Here,

• Normal Rate of Return = 10%

• Total Capital Employed = Rs. 5,75,000

We know that,

• $\dag \: \: \underline{ \boxed {\bold{ \: Normal \: \: Profit = \dfrac{Total \: \: Capital \: \: Employed \times Normal \: \: Rate \: \: of \: \: Return \: }{100}}}}$

Using this formula,

• ✠ $\rm{ \: Normal \: \: Profit = \dfrac{Total \: \: Capital \: \: Employed \times Normal \: \: Rate \: \: of \: \: Return \: }{100}}$

➨ Normal Profit = Rs. $\rm{ \dfrac{5,75,000 \times 10}{100}}$

➨ Normal Profit = Rs. $\rm{ \dfrac{57,50,000}{100}}$

➨ Normal Profit = Rs. 57,500

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❒ Calculation of Super Profit :-

Here,

• Average Profit of the firm = Rs. 1,25,000

• Normal Profit of the firm = Rs. 57,500

We know that,

• $\dag \: \: \underline{ \boxed{ \bold{Super \: \: Profit = Average \: \: Profit - Normal \: \: Profit }}}$

Using this formula,

• ✠ Super Profit = Average Profit of the firm - Normal Profit of the firm

➨ Super Profit = Rs. 1,25,000 - Rs. 57,500

➨ Super Profit = Rs. 67,500

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❍ Calculation of Value of Goodwill under Capitalization of Average Profit :-

We have,

• Capitalized Value of Average Profit of the firm = Rs. 12,50,000

• Net Tangible Assets = Rs. 5,75,000 (Total Capital Employed)

We know that,

• $\dag \: \: \underline{ \boxed {\bold{ \: Goodwill = Capitalized \: \: Value \: \: of \: \: Average Profit - Net \: \: Tangible \: \: Assets \: }}}$

Using this formula, we get,

• ★ Goodwill = Capitalized Value of Average Profit - Net Tangible Assets

⇒ Goodwill = Rs. (12,50,000 - 5,75,000)

∴ Goodwill = Rs. 6,75,000

• Hence, Value of Goodwill under Capitalization of Average Profit is Rs. 6,75,000.

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❍ Calculation of Value of Goodwill under Capitalization of Super Profit:-

We have,

• Super Profit of the firm = Rs. 67,500

• Normal Rate of Return = 10%

We know that,

• $\dag \: \: \underline{ \boxed{ \bold{ \: Goodwill = \dfrac{Super \: \: Profit \times 100}{Normal \: \: Rate \: \: of \: \: Return}}}}$

Using this formula, we get,

• $\bigstar \: \: \sf{ \: Goodwill = \dfrac{Super \: \: Profit \times 100}{Normal \: \: Rate \: \: of \: \: Return}}$

⇒ Goodwill = Rs. ( $\sf{\dfrac{67,500 \times 100}{10}}$ )

⇒ Goodwill = Rs. ( $\sf{\dfrac{67,50,000}{10}}$ )

∴ Goodwill = Rs. 6,75,000

• Hence, Value of Goodwill under Capitalization of Super Profit is Rs. 6,75,000.

Answer 2

Answer:

Capital value of Avg Profit Method:

=125000×100÷10

=1250000

Now,cap employed :

=250000(ravi's cap)+50000(ravi's current)+300000(kant's cap)-25000(kant'current)dr.

= 575000

Goodwill= 1250000-575000

=675000ans.

=